Windjam

Measure of Wealth = (1+R)^N <-- 1 $ today growing at 10% becomes 1.21$ in 2 years (N=2).

Now you have a wealth tax of say 2%
so your ending wealth = 1.21 * 0.98 = 1.1858

tax drag = 1- [(1.1858-1)/(1.21-1)] * 100 = 11.52%

say time became 3 years

1.331 * .98 = 1.30438
Tax drag = 1 - [0.30438/.331*100] = 8%

the wealth grows faster than the amount of tax applied (since it is a fixed portion of the ending wealth).

now if return increased as well -> the ending wealth is much higher, (you should be able to do similar calculations as above) but the tax applied is a much smaller proportion of the ending wealth.

CP



Edited 1 time(s). Last edit at Thursday, April 7, 2011 at 06:17AM by cpk123.